LTB 695/11 - Implications of the Postal Services Act

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Letter to Branches




No. 695/11
Ref : 24209
Date: 8th August 2011



TO ALL BRANCHES WITH POSTAL MEMBERS




Dear Colleague

Implications of the Postal Services Act

As part of moving forward the Union’s main Annual Conference Policy (Emergency Motion 3), the Postal Executive has been assessing the implications of the Postal Services Act on CWU members, the Union and the company.

The attached document, produced by our Research Department, highlights the key areas dealt with by the Act and scopes its likely implications. This is a reference document and is a useful paper for Branches and Representatives to gain a better understanding of the range of issues now facing the Union and the way events are likely to unfold.

The significance of the European State Aid Process

In our deliberations, the Postal Executive has identified the need for the Union to learn more about all aspects of the State Aid process, including the full consequences of either its success or failure.

The European State Aid Process is integral to the historic pension’s deficit being taken on by the Government. It is also clear that the Government are not in a position to proceed with a sale until State Aid clearance is given. As far as the process is concerned it is not just a question of whether or not clearance is given, there will also be a major debate about what type of aid can be provided and the terms that under certain circumstances can be put forward by the European Commission.

The company has finalised its new Business Plan (now known as the restructuring plan) and this has been agreed by the Government and forms the basis of their case for what is known as “Restructuring Aid”. As well as removing the historic pensions deficit, the Government is supporting the company’s request to improve the Royal Mail Groups financial balance sheet by potentially wiping off some or all of Royal Mails debt from previous Government loan of £1.7 billion, which was made on commercial terms.


As reported in the press last week, the early indication from Brussels is that achieving State Aid clearance will not be straightforward. Furthermore, the negative tone from the commission, suggests that reaching a decision by March 2012 is a stretching target. The significance of this date is that this is around the time when the company will be liable for a further pension deficit payment of around £300 million, which it is likely to argue it cannot afford.

One potential outcome of the European State Aid process is that rather than “Restructuring Aid”, the company could face the imposition of what’s known as “Rescue Aid”. This is likely to involve much harsher terms, imposed by the commission, that could be damaging to members interests.

During the course of the State Aid process the Governments case will also be open to intense lobbying from Royal Mail’s competitors, who will be claiming that State Aid, the removal of the pension deficit and changes to regulation will give Royal Mail an unfair advantage over the competition.

It can be seen from the content of this LTB, that for a variety of reasons the outcome of the State Aid process is crucial to future developments in the Postal Industry and will impact one way or another on CWU members. This is just one aspect of a range of issues arising from the Postal Services Act that will need to be the subject of ongoing discussions with the Government and the company.

To deal with all of these matters, the Postal Executive is developing a more detailed policy position that will determine both the Union’s approach to the State Aid process and further clarify our objectives in our talks with the Government and the company.

In moving the Union’s policy forward it is very important that all Postal Branches and CWU Representatives gain a better understanding of all the issues covered in this LTB.


Any enquiries to this LTB should be directed to the DGS (P) Department.



Yours sincerely

Dave Ward
Deputy General Secretary (P)











IMPLICATION OF THE POSTAL SERVICES ACT 2011


The Postal Services Act 2011 received Royal Assent on 13 June 2011. The Act allows for the privatisation of Royal Mail, the separation of Royal Mail from Post Office Ltd and the mutualisation of Post Office Ltd. The Act also allows the government to take on the assets and liabilities in the Royal Mail Pension Plan and makes a number of changes to the regulation of postal services.

This document summarises a number of key issues dealt with by the Act and their implications for Royal Mail and the CWU. This document is not a comprehensive record of all aspects of the Act. A separate document has been circulated which provides a thorough summary of the Act and the CWU’s parliamentary campaign.

Privatisation

The Postal Services Act allows for the privatisation of Royal Mail (excluding Post Office Ltd) and requires that at least a 10% share of Royal Mail is transferred to employees.

The Act does not specify what form a sale of Royal Mail will take. It could take the form of share issue, where shares would be publicly traded. Alternatively the government could seek one or more strategic investors to buy all or part of the business.

Before any sale goes ahead the government needs to take on the bulk of the deficit in the pension plan, improve the business’s balance sheet (reduce the business’s debts) and ensure a new regulatory framework is in place. Both the pensions’ solution and a reduction in Royal Mail’s debts are dependent on European state aid clearance.

The government recently made its application to the European Commission for state aid clearance to allow it to take a large proportion of Royal Mail’s pension liabilities and to allow it to restructure Royal Mail’s debts (potentially wiping off some or all of the £1.7bn borrowed on commercial terms to fund modernisation). Royal Mail’s recently-revised business plan formed the basis of this application. A decision as to whether or not to grant state aid is not expected until March 2012 at the earliest.

Royal Mail faces significant problems if a decision is not reached by March 2012, as without a pensions’ solution in place the company will become liable for a further pension deficit payment in the region of £300m, which it is likely to argue it cannot afford.

If Royal Mail is unsuccessful in its application for state ‘restructuring’ aid (which the business believes is a possibility), it faces the imposition of ‘rescue aid’ from the European Commission. This means state aid in exchange for undertaking a form restructuring imposed by the European Commission, which is likely to involve much harsher terms that could be damaging to members’ interests.

The government claims that it has not and will not start thinking about the form of sale it will undertake until after the state aid decision has been received. The Shareholder Executive has argued that value for taxpayers and the future of the USO are the main objectives in any sale; this means theoretically the identity of any future buyer or the form
of a sale and its implications for the stability of the USO could be considered in the privatisation process. However, the government is under no duty to take such factors into account and has given no assurances that it will do so.

Royal Mail and the Government have committed to sharing information with the CWU on developments relating to the state aid application. The CWU will continue push for information on the form of any sale and will seek to highlight the importance of the buyer and form of the sale on the future of the business, its employees and the universal service.

Employee shares

The Postal Services Act requires that a minimum of 10% of shares in Royal Mail are transferred to employees before Royal Mail is fully privatised.

Arrangements for the establishment of an employee share scheme need to be made before any shares in Royal Mail are sold; however, shares do not have to go to employees before the sale of the business begins, as long as 10% of shares go to employees before the government has entirely disposed of its shareholding.

Following pressure from the CWU the government amended the Bill to require that full details of the employee share scheme be included in a report to parliament ahead of a sale.

The government has shared little or no thinking as to the form of an employee share scheme. Shares could be distributed directly to employees, as was the case in previous privatisations such as BT, or held in some form of trust.

The form of an employee share scheme will influence the long-term value of the shares to CWU members. The Act obliges the government to introduce an employee share scheme. While the union does not endorse an employee share scheme as an appropriate means of remuneration or employee engagement, the union has the opportunity to maximise the value of such a scheme for members through engagement with the government and Royal Mail.

Regulation

The Postal Services Act made a number of changes to the regulation of postal services. Firstly, it transfers regulatory responsibility from Postcomm to Ofcom. Some minimal powers have already transferred and Ofcom is expected to soon publish a document detailing how the change will proceed. Ofcom is expected to take regulatory control in the autumn and to consult on a new regulatory framework to take effect from April 2012.

Access

In 2009/10 Royal Mail reported a loss of £157m on downstream access mail. In response to a special application from Royal Mail, Postcomm allowed the company to increase access
prices from May 2011. Royal Mail has stated this means downstream access will now be ‘roughly revenue neutral.’ This should mean that Royal Mail will not make a loss on access mail, which is a significant change. However, it is still unlikely to make a profit on downstream access items, which account for over a third of its volumes.

Postcomm has also implicitly recognised that the level of headroom it has set between Royal Mail’s retail and access prices will still allow rival operators to undercut Royal Mail. It is therefore unlikely to win back the market share it has lost.

The Postal Services Act allows Ofcom to mandate and price control access to Royal Mail’s network if this would promote efficiency and competition, benefit users and would be necessary to prevent uncompetitive behaviour. It is not yet clear what impact these new requirements will have. Postcomm’s initial proposals for regulatory change indicate that, while some change to pricing might need to occur, access in its current form is consistent with the Act and should continue.

Postcomm has undertaken a high-level review of access, including whether headroom and price regulation on access should remain. Royal Mail and the CWU have both argued that access should no longer be regulated. Postcomm is yet to publish a decision. Ofcom is expected to consult on concrete proposals regarding the access regime for 2012 in the autumn.

Commercial rate of return

Following pressure from the CWU the government amended the Bill in the Lords to require Ofcom to ensure that Royal Mail is able to make a commercial rate of return on any expenditure in relation to the universal service. The government also made assurances during the debate in the Lords that, when imposing access prices, Ofcom would have regard to the costs associated with meeting the universal service.

What this will mean in practice is not yet clear. Neither Postcomm nor Ofcom has yet defined what it means by a commercial rate of return. Moreover, there is likely to be disagreement over which of Royal Mail’s costs are associated with the universal service and therefore should attract a commercial rate of return.

It will be important to Royal Mail to seek to maximise the proportion of its costs which are deemed to be associated with the universal service and thus maximise the extent to which its profits are protected by the regulator.


Universal service

The minimum requirements for the universal service were set out in the Postal services Act and, following significant lobbying from the CWU, the government gave assurances that this minimum would not be reduced during the course of the current parliament. There are
however, a number of mechanisms which would allow the government to reduce the minimum universal service requirements at a later date. Moreover, the actual products that form part of the universal service remain at the discretion of the regulator. For example, Postcomm is currently consulting on the removal of bulk mail products from the universal service. This is consistent with the Act.

The Act includes a clause which allows the regulator to assess whether the universal service is a financial burden on Royal Mail. If the universal service is found to be a burden the regulator can choose from three courses of action. It can: reduce the minimum requirements of the universal service; establish a universal service support fund into which other postal operators would be required to contribute; or give all or part of the universal service to an alternative operator.

Following pressure from the CWU the government amended the Bill to prevent all or part of the universal service going to an alternative operator within 10 years of the passing of the Act. However, under pressure from private postal operators, the government ruled that a review of the burden of the universal service - which could result in the establishment of a universal service support fund - could not take place for a minimum of five years, rather than three, after the passing of the Act.

Separately from the Act, Postcomm has recently consulted on a number of issues relating to the universal service. Firstly it has questioned whether universal service products should continue to be price controlled. Royal Mail has argued that price controls should no longer apply. The CWU has argued that, while we recognise that there may be a need for the price of universal service products to rise in future, we believe some form of control should remain, to prevent excessive costs being passed on to domestic customers through stamp price rises.

Postcomm has further consulted on a definition of what it means for universal service products to be affordable. It believes that if expenditure on postal services is within household budgets and universal service products are priced below the threshold of willingness to pay, then they are affordable. This allows the regulator to conclude that there is a “very significant margin available before they might be considered unaffordable”. In line with this, the regulator has suggested that stamp prices could rise between 10 and 20 times and still be deemed affordable. The CWU is strongly opposed to the use of this definition and believe it would result in unacceptable stamp price rises which would run counter to the commonly understood definition of affordability. Ofcom has not indicated if it will pursue this line of Postcomm’s work.

Pensions

The Postal Services Act allows the government to take on the bulk of the deficit in the Royal Mail Pension Plan (RMPP), an objective the CWU has been campaigning over for many years. The transfer of assets and liabilities cannot take place until after the state aid
application has been approved. The government has indicated that, assuming the application is successful, the transfer will take place from April 2012.

The detail of the transfer and the new government scheme are still being developed. There is work to be done to ensure that the new government scheme and the remaining RMPP work together effectively to ensure that members are not disadvantaged by the new arrangements. Equally, governance arrangements for the new government scheme are being considered. The government has made initial suggestions for the scheme and the CWU has the opportunity to influence these proposals and seek to maximise union representation in governance structures.

Royal Mail Governance

Royal Mail has indicated that it is willing to discuss new governance models for the business. This could include greater union involvement in decision making processes within the business. This is clearly a sensitive area for any union and careful consideration of how to respond and engage with the business is necessary. The union will wish to maximise its influence for the benefit of members. There is potential to increase union influence without compromising independence; the successful operation of union-nominated pension trustees should be considered in this regard. The union now has the opportunity to explore governance options.

Post Offices

The Postal Services Act requires that, on the sale of Royal Mail, Post Office Ltd remains in public ownership. However, it also allows for Post Office ltd to be mutualised. This means establishing Post Office ltd as an organisation owned by members and operated for the public benefit. Membership could potentially comprise a combination of employees, sub-postmasters and customers or their representatives.

The CWU opposes the separation of Royal Mail and Post Office ltd along with mutualisation; neither is a solution to the financial position of the Post Office.
Following pressure from the CWU, the government amended the Bill to require Parliament to approve future mutualisation plans through a vote in both Houses of Parliament. This is a significant concession and means mutualisation is not guaranteed.

The government commissioned the organisations Co-operatives UK to produce a report exploring options for mutualisation. The report concluded that a mix of owners to include employees, sub-postmasters and service users, such as customers and community groups, would be preferable to one comprised of employees and sub-postmasters only. The government welcomed the report and is expected to consult on options for mutualisation of Post Office Ltd in the autumn.

The structure of mutualisation will affect the influence Post Office ltd employees will have on the future of the Post Office. The union has the opportunity to engage with government and other stakeholders to ensure that if mutualisation goes ahead its form allows employees a meaningful say in the future of the business.

Moreover, plans for the separation of Post Office ltd from Royal Mail are well underway. Operational separation is expected to occur by the autumn, following the establishment of a
new independent Post Office board and two new inter-business agreements, one dealing with mails and one with internal functions. In the spring Post Office ltd is expected to move from being a subsidiary of the Royal Mail Group to being a sister company to the Group and a subsidiary of the parent company Royal Mail Holdings. This structure will remain until the privatisation of Royal Mail. The union needs to gain a thorough understanding of these plans, their impact on members and appropriate areas for negotiation. Statutory TUPE consultation will apply ahead of the transfer.